speed stably. (Figure 5)

Sales of Commercial Housing Promoted by Urbanization

It is estimated by our team that 1% growth of urbanization rate results in 5.11354%

increase of the sales of commercial housing. According to the “National Plan on New

Urbanization” carried out in 2014, the urbanization rate will continue to grow 1.35%

per year, bringing about 6.90309% increase of sales of the latter at the same time.

Psychoanalysis of Consumers

Fearing of the soar of the price, housing potential buyers always tend to make their

decision when the price of commercial housing raise steadily. With a slowly increase of

the price this year, a simultaneous expansion of sales can also be expected.

Lower Cost Helps Improving Profit of Real Estate Industry

Cement and deformed steel bars, two major building materials of housing, are still

extremely cheaper than several years before, dropping from RMB427/ton to

RMB235/ton (PO 42.5 in Jiujiang) and RMB5230/ton to RMB2374/ton respectively,

Policy Analysis

“De-Stocking” Policy Booming Real Estate Market

Implemented by the Central Economic Work Conference, de-stocking of the real estate

market has become a top priority of government work this year, and many simulative

policies such as lowering down payment to 20%-25% and benchmark interest rate to

the relationship between growth rate of commercial housing price and that five major

variables which can influence it to a great extent are shown in the following model. If

the M2 supply and the per capita income of both urban residents continue to grow as

expected, with the help of this model above, we can conclude that the price will continue

to growth 10.6783%, 12.1175%, and 12.8028% respectively in the following three

years and is 39.9767% higher than that of 2015 in 2018 in total.

Comparative Analysis

As what is shown in the table, compared with the Japanese data in 1990, China is still

far away from the crash of real estate market. China’s urbanization rate and the GDP per

potential to improve the sales of commercial housing and the ability to remain a middle-

Competitive Positioning

Bargaining Power of Suppliers | MODERATE

The main suppliers in real estate industry are land and building material suppliers.

Lands are possessed by the state and provided limitedly by the local government in

mainland China, which means land suppliers have a strong bargaining power. As for

materials, overcapacity in traditional industries as steel and cement has weakened their

bargaining power in providing products. The strong bargaining power of upstream

industries and the leading effects of Vanke itself are the key determinants in our

MODERATE assessment of bargaining power of suppliers.

power of customers in major big cities is weak. With more than 90% of Vanke’s real

estate business expanding in first and second-tier cities in which demand of housing

exceeds supply mostly, we assess the bargaining power of customers as

INSIGNIFICANT.

Threat of New Entrants | INSIGNIFICANT

With a notable downtrend in real estate industry and a stricter governmental regulation,

entering this industry has been harder than before. There are 141 domestic real estate

listed companies, which means it’s quite difficult for the new entrants to grab a share in

the big market compared with old ones who own a more competitive position in getting

funds, lands and materials. These significant barriers (large market size, destocking

pressure, newcomer disadvantages) to entry are the basis of our INSIGNIFICANT

Vanke’s major competitors, namely Evergrande, therefore, has a broader business line.

Merit

Rigid Demand Created by Urbanization Promotes Commercial Housing Sales

According to our model, every 1% growth of urbanization rate can lead to 5.1134%

increase of sales of commercial housing. Meanwhile, the target China’s urbanization

rate of 2020, which is 3.9% higher than that of 2015(56.1%), was already set by

“National Plan on New Urbanization” carried out in 2014, indicating an annual

6.90309% growth rate of the sales of commercial housing promoted by it on average.

That’s to say, if the urbanization can be promoted as expected, there will still be a

strong rigid demand created by it, offering the whole real estate industry a valuable

reserve requirement ratio (RRR) also fell back to an easing policy level. From the

perspective of industry capital, the real estate developing capital has reached RMB

12.52 trillion in 2015, reporting a 2.2% (YoY) increase. From the perspective of

formation of capital source, domestic loans and self-raised funds take up 14.6% and

Loosening credit policies and continuous downtrend of market interest promote the

sales market, resulting in other sources (mainly pre-payment and mortgage repayment)

of real estate developing capital increasing 3.7% to a total of 44.5%.

Core Build-for-sale Operations Providing High Operating Cash Flows

Urbanization level has been consistently increasing over the years and is expected to

continue this trend in the future. Capital along with talents will surge up big cities

demands. Besides, the more and more complete competition market will squeeze

smaller player’s space who is confined to their limited capital, brand value, cost control

system on contrary the leading player including Vanke will enlarge market share. So the

two strong growth drivers ensure Vanke consistently meeting regulatory and marginal

goals and keeping high operating cash flows.

Vanke has a favorable cash position as shown by its high liquidity ratios, also the

company has low levels of debt bearing interest lower than most main competitors.

through adopting Asset-Light Strategy, utilizing an efficient web-based marketing

Optimistic Outlook for Real Estate Market

De-Stocking of real estate market was listed one of the five primary tasks in 2016 for

the first time in the Central Economic Work Conference in the end of 2015, with

supporting policies as reducing the minimum down payment ratio to 20% and lowering

transaction taxes carried out during Spring Festival. This, undoubtedly, promotes the

de-stocking process. It is not difficult to assume that under the uncontrollable

macroeconomic downturn, investment still plays an important role in steady economic

growth. Both monetary and industry policies will be loosened further. As bonus policies

released continuously and consumer confidence recovering gradually, sales of

commercial housing this year will gain a smooth growth after the recovery in 2015.

in a lower speed than expected, or even decrease, and therefore, greatly constrains the

growth of future price of commercial housing. As for Vanke, whose main business is real

estate, may also have more difficulties in making satisfactory profit.

Asset Restructuring Risk Occurring

Vanke is currently confronted with the toughest task ， asset restructuring and

unprecedented long halt period，almost throughout its enterprise history. The complex

restructuring may incur various challenges through each stage of the process. The risks,

land storage. Once the land prices go up, Vanke is bound to confront the challenge of

losing the price advantage.

Highly Competitive Market

The top 4 real estate companies take up a market share of barely less than 10%. Vanke,

as the biggest real estate developer, has the biggest market share of about merely 3%,

rising by 0.94% in 5 years. Apart from fierce competition among a great many joint stock

enterprises, advantages due to land policies are more obvious compared with their

state-owned counterparts.

because of the dividend policy along with the structure traits of the company. We find

that the free cash flow in Chinese companies especially in the construction industry is

unpredictable and the dividend payout rate is not stable, thus making the result of

forecasting methods like DDM or DCF unreliable.

As has been shown in the report, the abnormal returns method is employed as the main

way for us to conduct the absolute valuation of the target company.

Using the net profit obtained from our projected financial statements, capital

expenditure (Ke) as well as net asset at the beginning of the period, we managed to

calculate the abnormal returns for the projected years. (Table 2)

The present value of residual is calculated as the total abnormal returns for the forecast

period*(1+ Period Growth)/ (Ke – Period Growth)*present value factor, which is then

added up with the present value of the abnormal value to estimate the total abnormal

value.

By adding the net asset of the basic period and total stock value for the previous periods

as well as by subtracting the minority stockholder’s interest, we get the total value of

deformed steel bars, which saw 44.96% and 54.61% drop respectively in the past five

years.

Finance crisis. Judging from the trend shown in the graph, we are confident to estimate

and our forecasts on operating income and cost. (Table 6)

Overview

only account for 20% for total debt. If exclusive the deposited receivable the asset-

liability ratio of Vanke is only 39%. The OPM strategy successfully helps Vanke lifting

interest burden from finance leverage. (Figure 19)

With the consequence and consistency of the light asset strategy, Vanke’s liquid ratio

and solvency ratio keeps in high level and the growth speed of land reservation remains

stable, even conservative——fortunately the prudence contributes to Vanke getting rid

of inventory and land reservation pressure as peers.(Figure 20)

Execution of this strategy mainly through: 1) participating joint venture projects at the

minority level but sharing higher economic interest by leveraging Vanke’s brand value

such as alliancing with strong players Wanda which will enhance Vanke’s long-term

valuable. Due to the continual urbanization process bringing more and more capital and

people into first and second-tier cities which will enlarge the whole market size and the

continuous success of this segment to help Vanke gain more market share in the

foreseeable years, Vanke’s sale will continuously grow. However, China’s property

industry appears to be heading into a downward growth rate path even under stimulus

policy (some of them are cancelled) because that the urbanization has begun to slow

and homeownership is gradually saturating.(Figure 7) We believe this kind of